Can A Lessor Disregard An Exclusivity Provision In a Lease Agreement After the Lessee has Defaulted?

An exclusivity provision is a provision that bars a lessor from leasing a rental unit to an establishment that competes with the existing lessee. There may be circumstances in which a lessor or owner may disregard an exclusivity provision in its lease agreement when the lessee or tenant defaults in its lease payments.

In BG Monmouth, LLC., v. Sue’s Frozen Yogurt, Inc., et. al., No. A-2020-10T4 (N.J. Super. Ct.App. Div. August 3, 2012), the Appellate Division of the Superior Court of New Jersey considered this issue. That case concerned the circumstances under which an exclusivity provision was rightfully abandoned.

The Plaintiff was the owner (Owner) of a shopping complex and shared a lease agreement with the Defendant, Sue’s Frozen Yogurt (Defendant, or Renter). The Defendant operated several food service establishments in Plaintiff’s shopping complex. Defendant’s establishments primarily served hot dogs, bagels, ice cream, and frozen yogurt. The lease agreement between the Plaintiff and the Defendant included an exclusivity provision that barred the Plaintiff from renting units in the shopping complex to proprietors that competed with the Defendant by providing primarily similar menu items. Id. at 2-5.

Though Defendant operated several food establishments in Plaintiff’s shopping complex, Defendant proved consistently tardy in paying rent and eventually left defaulted payments uncured.Plaintiff sent several letters to Defendant warning of the potential breach of the lease. Id. at 14.

The dispute escalated when Plaintiff granted a lease to Amazon Cafa food establishment that providedmenu items very similar to those of Defendant. Id. at 7. Defendant argued that Plaintiff breached the exclusivity provision found in its lease agreement. The exclusivity provision read as follows,

Provided the Lessee has not been in default hereunder and Lessee is operating the Demised Premises as a restaurant featuring hot dogs, ice cream, bagels, yogurt, and frozen yogurt, then Lessor agrees not to lease any space in the Shopping Center to any tenant whose primary business is either the sale of hot dogs, ice cream, bagels, yogurt and/or frozen yogurt.

Id. at 13.

In its decision, the Court began with the legal doctrine that [w]here the terms of a contract are clear and unambiguous there is no room for interpretation or construction and the courts must enforce those terms as written. Id. at 11.

In this case, the terms of the exclusivity provision clearly stated that it would only be enforced [p]rovidedthe Lessee has not been in default hereunder. However, since the lessee was in default (by not paying rent), the Court held that the lessee could not enforce the exclusivity provision.

Commercial Real Estate Law[MUSIC PLAYING] Commercial real estate law is something of a team effort. It's important that you have a law firm that can coordinate the various aspects we're dealing with-- architects, inspectors, banks in terms of financing, and actually, could involve tenants as well. This might be property that's rental property. And a whole host of other things. Not to mention the fact that there could be planning issues, land use issues, where it's important that variances be obtained and things of that nature, permits, and so forth. If we look at it as a legal matter in isolation, where none of those business exigencies matter, we're not doing what we should. If we look at it as a team effort, if we look at it as the lawyer's role is to try to coordinate all those things and work with all those professionals to get to the end game, which is a sale of the property-- whether you're representing the buyer or the seller, you still want that property sale to go forward-- then the result is generally better. The Nissenbaum Law Group is uniquely situated to serve clients and commercial real estate and environmental law, precisely because this is what we do. We're a commercial law firm. These are the exact types of transactions that we focus on. That gives us a unique ability to understand the transaction, understand the business exigencies behind the transactions, and be able to anticipate where problems may arise, obstacles that may be presented before a deal can close. It also enables us to be able to ask the questions that the clients themselves may not even be thinking of yet. Part of the lawyer's job is to advise the client to the extent reasonable of the risks involved. And they are always risks, and some of those risks will be hidden, some of them will be able to be deciphered. Some of them won't. But overall, to work with the client to achieve the result of closing that transaction, if the deal is such that it really should close and not be renegotiated.

Construction Law Info Blog

Construction LawWe have people come to this law firm all the time with construction deals that have gone bad. And I ask them, do you have a contract? And they say, I think I do, let me take a look. I ask them, have they read it? Well, I haven't really looked at it, I just signed it. Or, how about this one, I don't have a contract at all? And when I asked them, why didn't they bring a lawyer in in the beginning, frequently the answer is, because I had a sense that if I brought a lawyer in, if I over-lawyered it, that the deal wouldn't happen, that I would scare everybody away. And I hear this from the contractor side and I hear it from the customer side. But what I try to tell people is that a good lawyer will not muck up the deal. A good lawyer will not give the sense that we don't trust the other side or we're only looking at the worst case scenario. What a lawyer should be doing, and what I believe we do at our law firm, is to bring a level of practicality to the interaction. We understand that the deal should get done. We also understand that protections cannot ever be 100%. But something is better than nothing, and speaking about these eventualities in the beginning before they happen, before anything goes wrong, before it's emotional, is probably the best time to do it. So the two people, maybe more than two people, maybe you have a contractor and a sub-subcontractor, and maybe you have an architect and you have a landlord and all these parties who are acting in good faith, who really want the construction deal to happen, maybe they haven't thought it through and the way they're doing it is not the way it should be done. And the process of trying to put something down on paper is actually a process that serves them all well. Some of the provisions that are really important for a construction contract, whether you are the person retaining the construction services or the contractor, really has to do with the payment and how payment is going to be made, and what milestones need to be accomplished before payment needs to be rendered. When payment, how quickly payment needs to be rendered, in what form, and the level to which the services need to be performed in order to have been deemed to have satisfied and met that milestone, so that you can get paid. Some states actually have laws that are specifically enacted to protect contractors and allow for them to receive payment and secure that payment for services that they have rendered, even without a contract. So for example, in some states that would be called the Prompt Payment Act, it may have different titles in different states, but it specifically says that contractors can obtain a mechanic's lien or a construction lien on the property upon which they have rendered services and have a security interest in that property unless and until they are paid. A very important part of construction law, something that really does not exist in many other areas where there are transactions between people, contracts that are being signed between people, are the consumer fraud regulations and other regulations and statutes that deal only with construction. These are laws and regulations that have been put in place to protect people. And what they say is that contracts that are used in a construction matter, especially a residential construction matter, have to be in a certain format. They have to have certain verbiage, they have to have certain disclaimers and notices. And it can get very elaborate. A violation of this can result in a per se "consumer fraud" lawsuit. Meaning a lawsuit in which the consumer fraud violation is presumed, because the contract wasn't in compliance. Now why is that important? It's important because you could have a situation where a contractor is owed $3000, and he sues for that money because he's not getting paid. The customer alleges that there was a defect in the work and that the contract violated the Consumer Fraud Act because it didn't have certain disclosures in it. And as a result, the customer is able to counterclaim for far more than $3000. The customer is able to counterclaim for its damages for defective work, which of course it has to prove, but once that's proven, it gets those damages times 3. So it's called treble damages and attorney's fees reimbursement. So a $3000 case can result in a $100,000 counterclaim or more. Now, this is all state specific, and there are all kinds of variations throughout the country, but the important thing is that the contract itself must be compliant, not just with common sense, not just reflective of the deal, but also with respect to the regulations and laws that govern construction. All of this is really to say that a construction deal can become something that's very significant and very emotional. We're dealing with the place someone lives, we're dealing with the place someone works, we're dealing with a family business that has been established and has been around for years and possibly decades. And so it's very important that we as lawyers approach this representation with a sensitivity to that dynamic. Our firm enjoys working with clients in construction matters. We work with contractors and we also work with the customers of contractors, and we do that so that we have a complete understanding of the area, not just from the legal aspect, but also from many of the business fundamentals. And so that's what we bring to the table when we take on a construction matter.